ANZ Follows Suit And Cuts Exception Fees
Australian banking major last Thursday became the last of the Big Four banking groups to cut the hugely contentious exception fees as it seeks to re-evaluate and overhaul its customer charges.
The Melbourne based lender will either cut or drop the exception fees it charges on personal accounts, and abolishing as many as 27 fees in total.
The abolition of exception fees will cost Australia’s fourth largest lender $140 million, however ANZ intends to claw back some of those losses through the increasing of monthly account service charge by $1. The service charger on its key Access Advantage transaction account will now rise to $6.
The major banking group’s decision to pare back or abolish exception fees was lauded by consumer advocacy group Choice, who in particular had high praise for National Australia Bank’s decision to abolish overdrawn account fees on all transaction and savings accounts in July. Choice singled out the move as being the best initiative by a major bank for its personal customers.
“NAB doesn’t get full marks because it didn’t move on credit card fees, but they listened to their customers and set the benchmark. ANZ have cut overdrawn fees from $35 to $6, and no fee will be charged where the overdrawn amount is less than $50, but it’s a complex announcement because overdrawn fees will be charged daily up to 10 times a month.” Choice senior policy officer Elissa Freeman said.
Westpac is cutting all exception fees to $9, while the Commonwealth Bank’s approach is more in line with ANZ’s.
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Citibank To Challenge Big Four In Australian Credit Card And Mortgage Lending With Virgin Money Deal
US banking giant Citibank, has signalled its intention to become a major retail banking player in Australia, and wrest away market share from the incumbent Big Four banking groups. The lender on Monday announced a deal with Virgin Money that will give it a marketing platform to distribute credit cards, collect retail deposits and originate mortgages.
Last week Citi signed a 10 year profit share deal with Virgin Money, which commits its retail banking unit Citibank to provide funding infrastructure and a branch network to the joint venture.
Cit would like to replicate some of the success that Virgin Money had when it first undertook a joint venture of a similar kind five years ago with Westpac. Virgin Money eventually became a major player in the low interest rate credit card segment, eventually acquiring more than 750,000 accounts.
Virgin Money’s joint venture ceased to be operational last year with the majority of its customers accounts ultimately passing on to its joint venture partner Westpac.
Citi beat out Australian banking major National Australia Bank (NAB) in its bid to become Virgin Money’s joint venture partner. NAB has a slightly larger credit card market share compared with Citibank.
Citi is keen to break ground previously held by the major domestic retail banking groups, setting the ambitious target of exceeding NAB’s market share in three years. Citibank’s Australia chief executive has set the goal of increasing market share from its current 8.6 per cent to above 14 per cent in three years.
CBA and Westpac currently have the biggest share of the credit card market holding 17.4 per cent and 16.6 per cent respectively, whilst NAB’s market share stands at around 11 per cent.
“We want to break into the top four and take a market share of 13-14 per cent, and the trajectory of the business is in line with that. We’re going to provide a substantial boost to the growth in cards.” Mr Gori said.
The first credit card to be issued by the Citibank-Virgin Money joint venture is scheduled for launch next July, after which online savings and deposit products will then be rolled out. The accounts will only be able to be operated through the internet or through phone banking, and depositors will not have access to branch banking facilities.
The joint venture has plans for rolling out a credit card linked with Virgin Blue, which will include a rewards points program, in an attempt to directly compete with Qantas associated cards.
Citibank has set a target of 500,000 customers for the new credit cards in the medium terms, and the joint venture also plans to roll out a Virgin branded mortgage product in an attempt to challenge the dominance of the Big Four in mortgage lending.
Mr. Gori said there was room for an alternative banking provider, despite the domination of the big banks.
“I would argue that this is the best time to look at launching a product like this. There is demand for an alternative because there has been so much consolidation. There has been so much market share taken by the Big Four. We think the marketplace and consumers are screaming for an alternative. I think this is the best time.” Mr. Gori said.
Citibank said it would fund the credit card joint venture through its on domestic balance sheet initially, but later hopes to finance the portfolio from retail deposits over the long term.
In the last six months, Citibank has increased its deposit base by $500 million largely through term deposits.
Last year, as a result of the credit crisis, Virgin Money had to exit the Australian mortgage lending business because its status as a non bank finance company made funding either impossible or too expensive to obtain.
Virgin Money continues to operate a domestic superannuation and insurance business.
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Senate Maintains Stance On Ban On Big Four Banking Mergers
A Senate committee charged with looking at the Australian banking industry has issued a report which suggested that the Australian Government should maintain its Four Pillars policy, and not give approval for mergers proposed between the Big Four banking groups. The powerful Senate committee also suggested that parliament should intensify its scrutiny over competition in the retail banking market.
The Senate committee, known as the economics reference committee, recommended that a unit be assigned either from within the Treasury or the prudential regulator to oversee the compliance of conditions that have been attached to merger approvals, and levy fines on those lenders that fail to comply.
The 79 page report released on Wednesday included five policy initiative recommendations on all aspects of banking mergers, and examined the socio-economic impact of a number of recent controversial bank mergers, including last Octobers $2.1 billion acquisition of Bankwest by Commonwealth Bank, and Westpac’s $12 billion merger with St George.
The committee also looked at what measures were in place to ensure that the Westpac and St George merger complied with the conditions that were attached to its approval, and what should be in place for future bank mergers.
The report was also firm that Australia should remain committed to the current ban imposed on mergers between the Big Four banks.
The committee also said it would prefer that bank mergers to be completely regulated by the Australian Competition & Consumer Commission (ACCC) as with other industries.
“However, the committee is concerned that the (Trade Practices) Act sets such a high bar that the ACCC may not have grounds to prevent such a merger, which the committee would regard as not being in the national interest,” the report says.
Despite large concern with the broader industry in general, the report focused primarily on the retail banking market, and suggested that the ACCC, APRA and the RBA issue a joint annual report to parliament on competition within retail banking, cautioning that such a report should not increase the burden on financial institutions for reporting.
In granting approval for the Westpac St George merger, Federal Treasurer Wayne Swan imposed conditions such as maintenance of total branch and ATM numbers, and the abolition of foreign ATM fees.
The committee however noted that the only possible penalty for non compliance currently was the impractical option of rescinding approval of the merger and requiring it to be reversed.
However, the committee noted that the only penalty for non-compliance appeared to be rescinding approval for the takeover and a requirement for it to be reversed.
“This seems impractical, and too severe a penalty for many breaches,” the report says.
The report therefore recommended the creation of a new APRA or Treasury unit which would oversee compliance and have the ability to impose fines should an acquirer fail to meet its obligation.
The final policy initiative proposed by the report was for the ACCC to publish its commissioned research on proposed mergers in an effort to increase the level of transparency over the reasoning behind any of its decision.
The Australian Bankers Association an industry lobby stated that its initial view of the report was that it contained some “sensible” suggestions, including publication of non-confidential submissions on mergers.
“There are some recommendations which could increase the regulatory burden and compliance costs for banks, which might be passed on to customers in the form of higher costs for banking products and services,” ABA chief executive David Bell said.
“The ABA will examine these recommendations in more detail to assess whether the benefits outweigh the costs.”
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Australians Spend Less On Credit Cards In July
Australian credit card transactions fell during the month of July according to data released by the Reserve bank of Australia on Thursday. The total value of charge and credit card transactions including advances declined by 1.37 per cent.
$19.139 billion was spent on charge and credit cards by Australians in July, down from $19.405 billion in the previous month. Credit card repayments increased by 2.84 percent to $19.839 billion for the month.
During July, the balances held on charge and credit cards declined by 0.6 per cent to $44.569 billion from $44.853 billion, whilst balances which accrued interest fell to $31.653 billion in July from $31.703 billion in June.
In terms of value, charge and credit card purchases fell by 1.1 per cent in July from the previous month, whilst the total value of cash advances also fell by 5.6 per cent to $943 million.
The actual number of cash advances on credit and charge cards fell by 3.9 per cent in the month.
Despite the fall in spending the number of credit and charge card accounts actually increased by 16,000 in July, though the number of transactions or purchases using credit cards fell by 9,000.
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Competition Intensifies In Australian General Insurance Market
As competition intensifies in the $24 billion general insurance market, Australia’s largest general insurers may have to find other ways beyond increasing premiums to combat rising claims resulting from natural disasters.
A survey by professional services firm KPMG of the market for general insurance found that the entrance and emergence of new players such as Coles, Virgin Money and Australia Post may have placed pressure on larger rivals to maintain premiums or risk losing their market share.
Brian Greig, head of KPMG’s insurance practice, said new entrants had focused on price in order to build market share, providing robust competition to incumbents in the general insurance market, currently dominated by Allianz, Insurance Australia Group, Suncorp and QBE.
Mr. Greig said that Australian customers still have some degree of brand loyalty, unlike customers in the British car insurance market, who are heavily influenced by price.
“Any competition in the market is always going to have some pressure on the ability to increase rates, but I think the larger players would be thinking these are small players at this stage,” Mr. Greig said.
Over the last half decade or so, premiums have been steadily climbing as insures seek to contain the impact of rising claims and more recently offset investment returns that have declined in recent years.
According to the KPMG survey, gross written premiums have risen by 4.3 per cent in the last financial year and stand at $35.2 billion, largely driven by increases in premium rates, as insurers seek to focus on pricing for risk as opposed to volume.
The study pointed out that extreme weather events were now part of the norm, reflecting a new business environment for Australian general insurers.
The Victorian bushfires in February cost the insurance industry $1.12 billion, making it the third-largest weather event by cost in the past 15 years.
KPMG noted that changing weather conditions has means that the threat of bush fires has now increased.
The study suggested that if indeed insurers faced pressure to maintain premiums, then they would need to find other ways of making sure adequate capital existed to be able to pay claims for those sorts of events.
Options available included reinsurance which placed the bulk of the increased claim risk with reinsurers. By doing this, they could achieve a decent return from their investments through good funds management, and improve their claims processes so that only valid claims were paid.
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Consumer Group Praises Bank Hardship Provisions
Consumer watchdog Choice has praised the introduction of hardship provisions into bank’s code of conduct, and says the measure clearly demonstrate a commitment by lenders to help customers who are enduring financial hardship.
Elissa Freeman senior policy officer with Choice says the revised Code of Banking Practice now contains 12 separate recommendations for “the ways banks should deal with financial hardship, and that’s a very positive improvement”.
“Customers will certainly have a much clearer understanding of what to expect when they are dealing with banks on this matter. In the past, banks didn’t have good processes in place to manage the issue and, to be fair, most have been working to improve that situation.” she said.
Despite lauding the changes, Ms. Freeman said there had been scant progress made on other issues, as the Australian Bankers Association delayed the implementation of any policy initiatives in favour of waiting and seeing what the Federal Government’s response would be to consumer credit and unfair contract terms.
David Bell, chief executive of the Bankers Association said the industry had “accepted the vast majority of recommendations” made by Jan McClelland in her independent review of the industry’s voluntary code, completed last December.
In her review, Ms McClelland suggested that banks should adopt a “clear commitment to responsible lending”. Ms McClelland added that such a commitment should encompass a careful assessment of applications for credit that may result in financial hardship. She also said that lenders should be more proactive in aiding customers who find themselves facing hardship.
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NAB Challenger Acquisition To Come Under Competition Regulator Microscope
Australian banking major National Australia Bank’s (NAB) acquisition of Challenger’s mortgage origination and aggregation business for $385 million, will be scrutinised by the Australian competition regulator after concerns were raised over the increasing dominance in mortgage lending by the Big Four banking groups.
NAB’s ability to deny rivals from accessing Challenger platforms including Choice and Fast broking, should it end up controlling them will come under the regulators microscope.
The Australian Competition and Consumer Commission (ACCC) will also be consulting with market participants whether they believe that acquisition would give NAB the ability to substantially increase its market share in mortgage lending.
In August, NAB revealed its intention to acquire the mortgage origination and aggregation businesses of Challenger Financial. The deal would result in NAB becoming a key player in mortgage broking.
The announcement of the transaction came at a time where concern over the increasingly concentrated Australian banking landscape has been rising. Smaller regional lenders have been voicing their frustration over what they feel is an unfair advantage held by the banking majors for access to the Federal sovereign funding guarantee. Whilst mortgage lending has come to be almost 100 per cent dominated by the Big Four during the last quarter.
The major banking groups account for nearly 90 per cent of new mortgages written compared to 60 per cent prior to the onset of the credit market freeze. Some analysts suggest however when the figures are analysed to include indirect lending to non bank financial companies and mortgage brokers, market share held by the Big Four is closer to 100 per cent.
Under the terms of the purchase, NAB is set to acquire Challenger’s mortgage lending and distribution businesses, whilst simultaneously picking up its mortgage loan portfolio worth an estimated $4 billion.
Despite NAB acquiring a non banking financial company, ACCC chairman Graeme Samuel said the deal would come under rigorous review and is expected to finalise its view early next month.
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CBA Still Sees Sovereign Funding Guarantee As Vital
International investors have an increasing appetite for non guaranteed debt issued by Australian financial institutions; however issuers such as Commonwealth Bank of Australia believe that the sovereign guarantee still plays a vital role.
Despite the Big Four banking groups having increased the proportion of their funding raised through non guaranteed issues, in line with the unlocking of credit markets globally, CBA treasurer Lyn Cobley says that the guarantee is still extremely important, and her comments suggest that as a lobby, the major banking groups will not be pushing for the measure to be lifted any time soon.
As an asset class, Australian sovereign guaranteed issues are the fourth largest of their kind globally, with Australian financial institutions having raised more than $120 billion through the use of the guarantee since the introduction of the measure in December 2008. Only issuers from the US, UK and France have raised more.
“Until such time as we get more investors in the non-guaranteed format, and so long as there are other countries using the guarantee, then it is something which is very valuable to us,” Ms Cobley said in an interview with Dow Jones Newswires on Friday.
Domestic Australian investors however, have become increasingly comfortable with investing in non guaranteed issues, whilst the number of international investors also buying into non guaranteed issues is also rising.
“There’s certainly a growing acceptance of non-guaranteed product offshore,” CBA’s treasurer said.
One third of CBA’s funding has been through the issuance of non guaranteed bonds, since the sovereign guarantee was first introduced including a €1bn lower-tier II issue last month.
CBA is ahead of its $38 billion funding target for the financial year ending June 30th 2010, having raised $14 billion so far this fiscal.
Ms. Cobley did however say that financial institutions globally were making a concerted effort to reduce their dependence on government support.
“All of us are very focused on moving away from the guarantee in due course.” She said
The sovereign guarantee has enabled banks to plug the funding deficit caused by the cessation of the securitisation market. Despite the first signs of unfreezing occurring with the issuance of the first residential mortgage backed security last week, the primary market still remains largely closed.
“It’s not opened up to the extent that we would do anything about it,” Ms Cobley said.
The CBA treasurer also added that deposit growth has also slowed, as investors become more confident, and the panic that drove deposit growth at the end of last year subsides.
“We do expect deposits will move into other asset classes in the near future,” Ms Cobley said.
On the contentious issue of banks increasing their mortgage and business lending rates outside of any official tightening cycle by the central bank, Ms Cobley said funding pressures persist.
“There are continuing increases in our cost of funds. Even as the markets may improve, the fact is, we have cheaper term funding that is now maturing and rolling off, and we have to replace it with the more expensive term funding which has been around since the markets have been dislocated.”
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Australian Super Funds Fastest Growing In The World
New data shows that Australian superannuation (super) funds and their sovereign counterparts were amongst the 300 fastest growing pension funds globally over the last five years.
The research report authored by consulting firm Watson Wyatt, and an American investment trade journal, also shows that Australia’s Future Fund, is now the 11th largest sovereign pension fund in the world.
The report also added that in local currency terms, Australian funds had the fastest annual growth rates in the world during the 2003 to 2008 time period.
Australia’s sovereign and super funds grew at an average annual pace of 14.4 per cent over the last five years, compared with an average growth rate of 9.6 per cent, constituting the fastest growth rate amongst the world’s top 300 pension funds.
Graeme Miller of Watson Wyatt said that Australia’s policy of mandatory superannuation, one of the few countries with such a scheme, had driven the growth.
“The main driver far and away is compulsion. This meant these funds had very strong positive cash flows. The second-order effects would have been tax incentives where particularly over the last five years there have been tax events that have encouraged people to put more money into super.” Mr. Miller said.
Mr. Miller also added that the Australian stock market’s relative outperformance of global peers in the last five years had also been a driver of higher growth rates
There are twelve Australian funds amongst the world’s top 300 pension funds, comprising 2.1 per cent and with combined assets under management (AUM) of $254.91 billion.
By far and away the largest Australian investment pool is the Future Fund, with $52.84 billion under management. The remaining 11 local funds are dominated by public sector funds.
According to Watson Wyatt, the Future Fund is now the 11th largest sovereign pension fund in the world, and is ranked number 52 amongst the top 300 funds, up from 66 in 2007.
The world’s largest pension fund is the Japanese government’s pension investment fund, managing $1.5 trillion.
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CBA Used Financial Crisis To Extend Dominance
Credit Suisse says it believes that Australian banking major Commonwealth Bank of Australia (CBA) used the depressed equity valuations, caused by the global crisis in banking to extend its dominance of the Australian banking landscape and add further market share.
Australia’s largest mortgage lender increased its market share in mortgage lender partly by offering low variable rate mortgages and through the acquisition of HBOS’s Australian unit Bankwest last year.
The Sydney based bank acquired Bankwest and wealth management firm St Andrews at the distressed price of $2.163 billion, from troubled UK lender HBOS. HBOS was later acquired by Lloyds TSB largely to prevent it from failing completely.
CBA has been able to add between three and five per cent to its various lending and deposit bases by June 30, 2009 as a result of the Bamkwest acquisition.
Despite seeing growth slow in July, CBA continues to remain the clear market leader in mortgage lending with a 29.58 per cent market share when Bankwest is included.
CBA’s share of retail deposits is around 30 per cent.
James Ellis banking analyst with Credit Suisse says that because CBA runs Bankwest as a parallel unit, it is not subject to the same integration issues that face rival Westpac and its recently acquired subsidiary St George.
“I think CBA is looking at the financial crisis as a once-in-a-lifetime opportunity to improve and enhance their strong market position. The banking deal of the decade domestically has been CBA with Bankwest.”
Credit Suisse advised CBA on the Bankwest purchase and then completed the equity raising.
According to an AAP report which cited unnamed sources, during the negotiation for the sale of CBA, HBOS allegedly offered CBA its St Andrews wealth management business free of charge, conditional upon its acquisition of Bankwest.
Credit Suisse believes that of the Big Four banking groups, CBA remains the top equity pick due to strong revenue growth driven by gains in lending market share, increased scale in its wealth management business and high levels of retail deposit funding.
Credit Suisse notes however that the mortgage market will see increasingly difficult business conditions for all banks later in the year, as the first home buyers grant is eventually phased out.
CBA may be insulated from interest rate rises, which the market expects later this year.
On Wednesday, CBA’s chief financial officer said the lender maintained a $68 billion portfolio hedge, which would help mitigate against sudden moves in interest rates. The replicating portfolio was established 15 years ago and allows CBA to smooth its net interest margins over time across 15 products prone to interest rate volatility.